Xi Jinping will have his hands full trying to steer an economic juggernaut on the path to sustainable growth. It's a task so mammoth that it may keep the world's most powerful leader out of sight.

It may be no exaggeration to say that Xi Jinping is now the world’s most powerful leader. To be fair, there’s not an awful lot of competition. Barack Obama, the US president, has been humbled abroad in Syria and weakened at home by the embarrassing failure of his healthcare plan. Perhaps prematurely, he is already being cast as a lame duck. Angela Merkel, the German chancellor, may not see out her third term as head of what, by Chinese standards, is a medium-sized national enterprise. Shinzo Abe, Japan’s prime minister, is in charge of the world’s most impressive printing press, though hardly its most robust economy. By default, that leaves Xi, who has nine years left at the helm of an economy that could be the world’s biggest by the time he leaves office in 2020.

More, Xi has wasted no time in shoring up his power base domestically. In just 12 months he has become arguably China’s strongest leader since Deng Xiaoping. Evidence of that came last Friday with the release of the unpromisingly titled, but potentially vastly significant, “Decision on Major Issues Concerning Comprehensively Deepening Reforms”. The document – already being referred to in English simply as “the Decision”, as if it had been handed down from on high – details what looks like the most ambitious reform push since Zhu Rongji, the former premier, oversaw a radical overhaul of the state sector more than 10 years ago. A blueprint for the next decade, the Decision shows that Xi’s team has got to intellectual grips with the severe problems facing China’s lopsided, investment-heavy economy and, more to the point, is not afraid to do something about it.

Xi’s consolidation of power has been swift. Unlike Hu Jintao, his wallflower predecessor, he immediately took on all three of the country’s top positions, becoming, in order of importance, general secretary of the Communist party, chairman of the military commission and, oh, President of China. He quickly launched an anti-corruption drive that sent a shiver of fear down the spines of party hacks. He has also cracked down on internet dissent and brought foreign policy more directly under his control, the latter reflected in the formation of a National Security Council.

Chris Buckley, writing in the New York Times, describes Xi as an “imperial president” lauding it over his six colleagues on the politburo. Buckley quotes Xiao Gongqin, a proponent of “neo-authoritarianism”, who sees the new Chinese leader as a strongman capable of quelling political opposition in the interests of driving through necessary economic modernisation.

Indeed, Xi seems to be running the economic show too. Xinhua, the official news agency, in detailing how the Decision was formulated, refers only to Xi by name, neglecting to mention Li Keqiang, who, as premier and a trained economist, was supposed to be in charge of economic policy. The breadth and ambition of reform outlined in the Decision, a 21,000-character document, has taken many by surprise. Credit Suisse says the package addresses 16 areas of reform with no fewer than 60 significant initiatives, fleshing out what the party has signalled will be a shift to a “decisive” role for the market.

The changes that caught the headlines include the virtual abandonment of the one-child policy, a long overdue relaxation that probably comes too late to head off an impending demographic crunch. The party will also abolish the notorious re-education through labour system. These are both welcome developments, particularly for those who want more children or who are currently breaking rocks in the interests of improving their mind. Yet the most far-reaching reforms are economic and financial.

The common theme is that, while the commanding heights of the economy will be left in state hands, much of the public sector will be subjected to greater market rigour. Thus, rather than being supplied with subsidised finance and subsidised inputs such as land and electricity, state-owned enterprises will increasingly be expected to pay the going rate. They will be squeezed harder by a state that needs to collect more funds to build a social safety net, itself an essential component in the so-far failed endeavour to wean the economy off investment and on to consumer demand. Local governments will be able to levy a property tax. Conversely, their ability to raise funds by expropriating land will be curtailed as landowners’ property rights are strengthened. That ought to make it easier for farmers to move to the cities, a potentially important driver of growth-sustaining urbanisation that will be helped by relaxation of the hukou registry system.

Of course, this is the theory. It is much easier to write all of this stuff down than to implement it. Yet if even a fraction of the Decision is put into practice, China’s economic model will change significantly. That should bring benefits in terms of economic rationality, though it will also cause pain by squeezing out inefficiency and overcapacity.

China’s economy is running out of juice, requiring ever-greater inputs for ever-diminishing returns. The Decision is an attempt to put it on a new track. It is a mammoth task. Xi will not only have to keep the economic juggernaut on the road. He will also have to give it the equivalent of an oil change and a tyre change even as it lurches forward. In that sense, he may not be the most powerful leader in the world after all. He will be far too busy with affairs at home to worry too much about making his presence felt abroad.

Copyright The Financial Times Limited 2013

David Pilling – FT

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